Oil and Gas Rights — Reserved? A Litigator’s Perspective On The Mong Case

A decision out of the Eleventh District Court of Appeals of Ohio, Mong v. Kovach Holdings, LLC, 2013-Ohio-882 (Ohio 11th Dist. March 11, 2013), represents a cautionary reminder that parties should carefully review the language of contracts they enter, especially the essential terms of the document, and especially contracts that convey away property rights. That is particularly true when a party parts with property rights set forth in warranty deeds. My colleague Jeff Fort blogged about this recently and asked me to add my thoughts.

In Mong v. Kovach Holdings, the plaintiff, Joseph Mong, sold approximately 70 acres of land near Warren, Ohio, he had recently acquired from Alice McMenamin to Defendant Kovach Holdings at auction. Mr. Mong apparently intended to reserve to himself the oil and gas rights associated with the property. According to Mr. Mong, the auctioneer informed the prospective purchasers of that reservation immediately preceding and subsequent to the auction. The auctioneer confirmed that he did so in a following affidavit. The purchaser of the property, Kovach Holdings, denied that that the auctioneer described any such limitations or reservations. The property sold for $245,300.

The parties shortly thereafter executed a standard purchase agreement, but which included the following handwritten language: “Gas + oil Royalty Reserved by Present owner.” Mr. Mong argued this language revealed that the oil and gas rights were not a part of the sale to Kovach Holdings. The problem, for Mr. Mong at least, was that the subsequent warranty deed by which Mr. Mong conveyed the property included no comparable language. It did, however, include merger language.

Mr. Mong filed a lawsuit with the Trumbull County Court of Common Pleas seeking to reform the warranty deed to conform to what he contended were the agreed upon terms of sale: just the land, not the mineral rights. Kovach Holdings unsurprisingly opposed the relief Mr. Mong sought, and submitted an affidavit which emphatically asserted that there had been no understanding there would be a reservation of oil and gas rights. The affidavit apparently did not address the handwritten language of the purchase agreement, and the court oddly made no mention of it. The parties filed cross motions for summary judgment.

The trial court denied Mr. Mong’s motion and granted Kovach Holding’s motion, meaning Mr. Mong lost whatever interest he ever had in the property’s oil and gas reservoirs. The court of appeals affirmed the trial court’s rulings. In support of its ruling, the appeals court noted that reformation of a contract is a limited remedy, available only when there is clear and convincing evidence that the executed document represented a mutual mistake by the parties, citing Wagner v. Natl. Fire Ins. Co., 132 Ohio St. 405, 412, 8 N.E.2d 144 (1937). See ¶¶ 20-21. The court was not persuaded that the evidence sufficiently supported Mr. Mong’s argument for mutual mistake. First, Kovach Holdings denied the warranty deed reflected a mistake — and also argued that the merger doctrine prevented Mr. Mong from even raising the issue. Thus, on the face of it, there was no mutual mistake. See ¶¶ 22-23.

Second, the court concluded that the handwritten language in the purchase agreement actually did not help Mr. Mong. As the court of appeals viewed it, the language in the purchase agreement providing that “the present owner” reserved the oil and gas rights did not refer to Mr. Mong at all, but to the owner who sold the property to Mr. Mong, Mrs. McMenamin: in essence she had reserved a life estate in oil and gas royalties for herself when she sold the property to Mr. Mong. See ¶ 24. Notwithstanding the fact that Mr. Mong did own an alienable future interest in the oil and gas rights, the court of appeals deemed that Mrs. McMenamin remained the “present owner” of the oil and gas rights.

Consequently, any reference in the purchase agreement to a reservation of rights with respect to oil and gas on the property referred to Mrs. McMenamin and not Mr. Mong. Thus, the court concluded, the language of the purchase agreement did not constitute evidence in support of Mr. Mong’s cause. As the court explained: “we are bound by the rule of construction that a ‘conveyance is to be construed most strongly as against the grantor, or in favor of the grantee.’ (Citation omitted.) Pure Oil Co. v. Kindall, 116 Ohio St. 188, 203, 156 N.E. 119 (1927). ‘Applying this rule, an exception or reservation in a conveyance is construed in favor of the grantee rather than of the grantor.’ Id.” ¶ 27. Accordingly, summary judgment and the oil and gas rights went to Kovach Holdings.

Perhaps some would argue this decision is inequitable and may not accurately reflect Ohio law. Who knows. Difficult cases can effect confounding conclusions. But whether the decision is correct or not, it offers a poignant reminder that those involved in the conveyance of real property involving or excluding mineral rights must make sure that the language in purchase and sale documents precisely reflects the parties’ unambiguous intentions. It is an old saw, but a true one. Trouble brews otherwise.

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